Site Search Navigation

Search NYTimes.com

Loading...

See next articles

See previous articles

Site Navigation

Site Mobile Navigation

Supported by

Horrid Housing Starts

By Floyd Norris June 17, 2008 1:11 pmJune 17, 2008 1:11 pm

The fact that housing starts are low and falling is not exactly a surprise. But the rapidity of the decline continues to amaze. So does the national nature of it, and how few starts there are these days.

Because starts can be volatile because of the weather, I use three-month moving averages.

The picture is as ugly as it has ever been. But it may get worse.

Over the three months through May, the average seasonally adjusted annual rate for single family home starts was 689,000. The last time the figure was that low, Ronald Reagan was president and Paul Volcker was the Federal Reserve chairman. Mr. Volcker was determined to snuff out inflation whether or not it meant the death of the housing and savings and loan industries. The problem then was not a demand for homes, merely the inability of would-be buyers to get loans they could afford, or any loans at all.

Now interest rates are far lower than they were then, but there is also an availability problem. Lenders are cutting back except in cases where the government, or a government-sponsored enterprise — is willing to guarantee repayment. And there is probably an over-supply of housing in many areas.

Another way to measure how rapid the decline has been is to compare the current seasonally adjusted rate with the actual number of housing starts over the preceding 12 months, again using three-month moving averages. A figure above 100 percent means starts are rising, while one below 100 percent means they are falling. The latest figure is 77 percent.

That is up from 74 percent in February and March, so I guess someone could decide that the worst is over. But it was the seventh consecutive month when the figure was under 80 percent. Other than a six-month string in 1981 and 1982, that figure has not fallen below 80 percent at any time since the figures became available in 1959. This is the 26th consecutive month in which the figure was under 100 percent, meaning a declining market for starts. That matches the longest such streak ever, set in the mid-1970’s, when a severe recession was caused by soaring oil prices.

Each of the four regions is under 80 percent, including the Northeast, which a few months ago appeared to be doing better than the rest of the country.

One more fact: Homebuilder share prices hit bottom in January, and then had a powerful rally. The S.&P. 1500 home builder index rose 59 percent over a period of just under three months. Now it has given up most of those gains.

To me, the wonder is that there are any housing starts at all. In significant parts of the country, it may be years before there is much demand for additional homes over the number already built.

For the industry as a whole, all the devastation from floods, hurricanes and tornadoes are going to lessen the impact of the slowdown of the subject National averages and increase the corresponding statistics/volume in affected areas.

However, this would be another blow to the insurance industry and a boost for retail, furniture, household appliances,etc. sectors….

Um… err… How do I say this politely? The suburbs and other far-flung housing locations are toast – and will be for many years with the advent of $4 to $5 gas and diesel prices. Those locations no longer make economic sense for most folks. And get this, there is absolutely nothing the government and federal reserve can do about it unless they are willing to subsidize fuel prices. Now, how do you say unintended consequences? It may take a decade or two to burn-off the over-supply of housing. Prices for homes in the Los Angeles area fell 27 percent compared to last year – and I’m afraid this is just the beginning. Just a little piece of anecdotal evidence from here in Tucson: In a recent survey, 71 percent said they’re forgoing their vacation this year to save money. Want to guess who they’re going to take that out on come the November elections? It’s definitely the economy stupid.

And, virtually ignored by the financial press, the recent rise in 10 year Treasury rates to over 4.25%from under 4% has dragged conventioanl mortgage rates correspondingly higher. Housing has a long way to go down.

I was a Managing Agent for the Resolution Trust Company during the last housing crisis in 89-91. Under excellent leadership (Seidman) we were ordered to get three appraisals, price homes at the average appraisal, show to as many potential buyers as possible,and sell to the highest bidder. Work fast and sell. Prices dropped 10-15%, buyers got good deals, the RTC got money to pay depositors. Housing struggled for a few more years, but there was a market.

RTC’s belief in moving quickly, combined with its willingness to accept marketplace price discovery, resulted in cash deals, regardless of book losses. Most sales were plus or minus 5% of appraised value.

Today, there is no RTC that is willing to accept book losses at prices set by willing sellers and buyers. Free-market investors are hoping government will bail them out. Homeowners hope they can hold on to their homes with a reduced mortgage. Result? Stagnation.

Well, considering the housing market and mortgage market, it’s a plus that housing starts are down. My guess would be that some of the initial (in this awful housing cycle) starts were designed to chew up land builders held and get rid of it. In a market like this, there is probably no effective demand for builder lots, but houses, at the right price, can be sold.

A builder’s loss on a house may be less than his loss selling a lot (if they can at any price) or sitting on the lots for ?? years.

One thing about analysis of publicly held home builders’ statements that you don’t hear much about is land values which are today effectively worth just over zip in many areas. What is 1/2 a subdivision worth for corn cultivation?

The big builders drove the market up and now they continue to drive it down. They still pull the same crap of tying the lending incentives in with the purchase. What’s amazing is lenders keep allowing it.
Beazer Home Mortgage, Taylor Woodrow Home Mortgage, Richmond American Home Mortgage, etc. These partnerships between builders and a mortgage provider is nothing more than a way for the builder to profit from the mortage cost. The consumer must use them to get the closing cost incentive, but the rate and cost are higher than the open market. The real damage, however, is that the independence of the bank and the appraiser are lost. When the builder owns a share in the lending broker and the builder makes profit based on the home selling and the price,the banks are exposed.
Isn’t amazing that when new homes were going up $4000 a month, no matter how the builder priced them, they always appraised with the builders preferred lender.
So it doesn’t surprise me they are in business. They can make money even at these prices. The banks continue to cut their own throats. If congress would haul these folks in for price fixing, and let us drill for oil, we might get somewhere.

Floyd,
Finally we are getting the declines in housing starts that we need to address the inventory of unsold homes.
Until now we have had had nothing but denial by the National Home Builders Association which has to be the dumbest organization in the world. All the way along, the publicly traded homebuilders have used add-ons instead of price declines to induce new buyers. It has taken them this long, apparently, to figure out that this is not working and they may be finally lowering prices and hopefully slowing their pace of newbuilds.

The latest news from UCLA’s Anderson report suggests that California Housing market is beginning to show some signs of life!

Floyd, sounds like the “Oil Lobby” with their commanders in chief, GW Bush & Dick Cheney, have finally managed to push the public opinion to its limits by threatening them with $250 oil and promissing to remove a “National Security Threat”!!! Both the White House and John McCain’s campaign are NOW pushing to lift the 1981 ban on offshore drilling in the continental US….

It will be an interesting/amusing next few weeks to watch the domestic politics of oil and the traders/pundits genius at work!!!

I agree with #8. The dramatic decline in housing starts is a clear sign that the market is finally coming to grips with the inventory issue. No doubt there is significant pain to come and permanent change in real estate and economic landscape, but the excess needs to be wrung out fully before recovery can begin for real.

Norris attributes the stagnant housing market to “an availability problem” of loans. Not true! For many would-be buyers, the problem is (still) astronomical house prices, not loan availability.

I could easily get a loan for a house, and I would very much like to be a home owner. But there is no way I’m going to pay $5000 a month in mortgage etc., which in my part of Los Angeles would buy a 1400 sq. ft. house in a school district where 60% of the students qualify for the state’s free lunch program. The same home would rent for about $2500/mo.

Well, let’s see:
Prices for raw construction materials continue to rise…
Average household income is for the most part stagnant…
Loan qualifications are reverting to previously conservative levels of requirement…
Huge glut of overpriced existing homes…
And so on, and so on…
Yup, I’d say the spec housing market is DOA for at least a few more years…

I AM THE BOOTS ON THE GROUND IN PHOENIX BURBS! LISTING REO ALMOST EXCLUSIVELY. IT IS SO SCARY, I KIND OF HOPE IT IS THE BOTTOM. I HAVE STOPPED TALKING ABOUT ALL THE HOMES I RE-KEY AND LIST, BECAUSE I AM AFRAID OF CAUSING MASS CAOS AMONG FAMILY AND FRIENDS. SHARKS ARE FIGHTING EACH OTHER FOR THE FOOD AT THE BOTTOM OF THE LAKE. THESE HOMES FALL LOW ENOUGH(TO CASH FLOW) AND IT’S A FRENZY. FHA BUYERS HAVE ALMOST NO CHANCE AT THEM. THE PROBLEM IS THE SHARKS WILL NEVER HAVE TO COME UP. THE HOMES KEEP FALLING DOWN TO THEM.
WE FOUND THE BOTTOM! IT’S CALLED CASH FLOW POINT OR AFFORDABILTY. QUIT WONDERING WHERE THE BOTTOM IS! START WONDERING HOW BIG THE LAKE IS(WIDTH NOT DEPTH)!
BTW: LOANS ARE TOUGHER TO GET. MOM TOOK THE SHARP KNIVES OUT OF THE CHILD’S HANDS AND GAVE THEM A BUTTER KNIFE BECAUSE THEY CUT UP THE PLACE. THE BUTTER KNIFE IS FHA!
JUST LIKE THE DOT COM MESS: INFORMATION GOT WAY AHEAD OF KNOWLEDGE.

The Affordable Care Act imposes economic burdens that are the equivalent of taxes, an economist writes. Read more…

About

Economics doesn't have to be complicated. It is the study of our lives — our jobs, our homes, our families and the little decisions we face every day. Here at Economix, journalists and economists analyze the news and use economics as a framework for thinking about the world. We welcome feedback, at economix@nytimes.com.